The European Central Bank and the Bank of Japan confirmed they intend to remain cautious

Macro Highlights
-
5/2/2018

In short

The European Central Bank (ECB) and the Bank of Japan (BoJ) have kept their monetary policies unchanged, as we expected. Both their messages were dovish...

… with Mr Draghi stating that the recent moderation in economic growth in the euro zone warrants caution…

… and the BoJ failing to reiterate that Japanese inflation should reach its inflation target in financial year 2019

Central banks – the ECB and the BoJ have maintained their accommodative monetary policies

The European Central Bank (ECB) and the Bank of Japan (BoJ) held their monetary policy meetings on 26 and 27 April, respectively. While the two central banks did not make changes to their monetary policies, both expressed caution in their communication, as we were expecting. Thus, ECB President Mario Draghi stated that the moderation observed in the pace of economic growth in the euro zone warranted caution, while the BoJ did not give a timeframe for inflation returning to its 2.0 % target, which at its previous meeting it had indicated could happen during FY 2019.

In the euro zone, the ECB maintained its key rates, the deposit rate and the refinancing rate, at -0.40% and 0.00%, respectively, reiterating that it intended to continue its asset purchases at a monthly pace of EUR30 billion up until September 2018 and “beyond if necessary”. Furthermore, it maintained its forward guidance with respect to its monetary policy, reiterating:

firstly, that interest rates would remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases;

secondly, that reinvestments, which it implements when the securities it holds arrive at maturity, would continue “for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary”.

In his introductory remarks at his press conference, Mr Draghi highlighted that recent economic data, notably confidence surveys such as the PMIs, but also industrial production figures, indicated a moderation in the pace of economic growth. While the ECB president did not wish to express alarm, considering this data to be “consistent with a solid and broad-based expansion of the euro area economy”, he nevertheless specified during the question and answer session that it was a source of concern for the ECB.

He notably indicated that the Governing Council was expecting a slowdown in activity following the strong acceleration in GDP growth in 2017, but specified that the extent of the slowdown was greater than anticipated. For Mr Draghi, certain exceptional factors such as the cold winter, strikes in some countries, and Easter holidays falling earlier than last year, could partly explain this weaker momentum. He nevertheless added that it could also have resulted from a softening in demand. Hence, the trends warrant monitoring by the ECB and a cautious analysis of economic trends.

Implications:

„As we were expecting, the ECB opted for the status quo, giving no additional indications as to a future change in its monetary policy.

„The tone of Mr Draghi’s speech, notably during the question and answer session, backed our scenario according to which the ECB could be more accommodative than expected in the coming months, especially as inflation persisting at a low level (core inflation came in at 1.0% in March, i.e. the same as in the first two months of 2018 and the 2017 average) is likely to convince it not to hasten the normalisation of its monetary policy.

„We thus maintain our forecast that the ECB will end its asset purchase programme in 2018 but will maintain its key rates at their current levels for a long time to come.

In Japan, the BoJ maintained its monetary policy unchanged keeping its key rate at -0.1% and reiterating its target for the 10- year JGB of close to 0.00%. As was the case at its March meeting, eight members of the monetary policy committee voted in favour of this decision, while Goushi Kataoka opposed it, considering that the BoJ should expand stimulus even further by revising downward its target for the 10-year JGB yield.

The new forecasts of the members of the monetary policy committee show that they are slightly more confident with respect to the GDP growth outlook for 2018 and 2019, but despite this do not expect stronger inflation than previously (inflation forecasts for the fiscal years 2017 and 2018 were, in fact, revised marginally downward).

In particular, at the publication of these new forecasts, the monetary policy committee members did not reiterate their previ ous statement that they expected inflation to return to 2.0% during the 2019 fiscal year, i.e. between April 2019 and end-March 2020. Thus, the BoJ, which already had to push back the horizon at which it expected inflation to return to its target six times, has finally given up on providing a timeline for reaching its target.

Implications:

The BoJ’s decision to maintain its monetary policy is in line with our scenario.

„The new forecasts of the members of the monetary policy committee confirm that, although they are more confident with respect to the outlook for GDP growth, they nevertheless do not anticipate an acceleration in inflation in the near term.

„Furthermore, the lack of guidance by the BoJ of a timeframe for a return to its inflation target is an important signal according to our analysis: the BoJ may be less confident of its ability to reach its inflation target in the medium term and it may have preferred to omit any reference to a timeframe rather han push back the date once again to avoid damaging its credibility.

„These factors underpin our scenario according to which the BoJ is likely to lastingly maintain, and for even longer than the other major central banks, its accommodative monetary policy. We maintain our forecast according to which in 2018 the bank should maintain its key rate and target for the 10-year yield at their present levels.